In Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir.), cert. denied, 479 U.S. 987, 93 L. Ed. 2d 582, 107 S. Ct. 579 (1986), the Second Circuit held that a shareholder does not have standing to assert a RICO claim where the corporation is directly injured, and the shareholder suffers only from the decrease in the value of his investment. "Plaintiffs lack standing to sue under RICO . . . . The legal injury, if any, was to the firm. Any decrease in value of plaintiffs' shares merely reflects the decrease in value of the firm as a result of the alleged illegal conduct." See also Carter v. Berger, 777 F.2d 1173, 1176 (7th Cir. 1985) (In RICO cases, "an indirectly injured party should look to the recovery of the directly injured party, not to the wrongdoer, for relief.")

In Klebanow v. New York Produce Exch., 344 F.2d 294, 296 (2d Cir. 1965) the Second Circuit construed Section 4 of the Clayton Act, 15 U.S.C. § 15, which authorized suit by "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." Klebanow found that a limited partner's standing was analogous to a corporate shareholder's standing: "When business is conducted by a partnership, the statute views the partnership rather than a partner as the person injured."
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The RICO statute, 18 U.S.C. § 1964(c), authorizes suit by "any person injured in his business or property by reason of a violation of section 1962." Because this language tracks Section 4 of the Clayton Act, "rules established in anti-trust cases for identifying the proper plaintiffs should be applied to RICO . . . too." Mid-State Fertilizer Co. v. Exchange Nat. Bank, 877 F.2d 1333, 1335 (7th Cir. 1989).

[A] limited partner's power to vindicate a wrong done to the limited partnership and to enforce redress for the loss or diminution in value of his interest is no greater than that of a stockholder of a corporation. As a general proposition, where a corporation suffers loss because of the acts of officers, directors, or others which diminish or render valueless the shares of stock of a stockholder, the stockholder does not have a direct cause of action for such damages, but has a derivative cause of action on behalf of the corporation to recover the loss for the benefit of the corporation.

However, Dana has standing to assert claims III and IV. Paragraph 133 of the complaint alleges:

The Joint Venture Limited Partnership Agreement further provided that if [M.D.A.] were [sic] unable to obtain a commitment from an institutional lender for the refinancing described above, within the time period described, the joint venture would terminate and the real property would be transferred back to DANA subject to the then outstanding indebtedness and certain cash payments made by [M.D.A.]

Dana alleges that M.D.A. did not obtain the commitment within the time allowed, and therefore, the Candlewood and Marina Properties should have been transferred to Dana. Instead, M.D.A. transferred the Marina property to itself, and encumbered it with a mortgage loan. Dana therefore alleges a direct interest in the Marina Property and a direct injury to that interest.

III. FC BANK'S MOTION TO DISMISS CLAIMS III AND IV

FC Bank argues that claims III and IV against it should be dismissed because of Dana's failure to plead the predicate RICO acts with particularity.

Dana alleges that FC Bank knew that the quitclaim deeds conveying the Marina Property from D.M.D. LP to M.D.A. were invalid, unauthorized, and a fraud on the plaintiff (Complaint P160). The factual basis for this conclusory allegation is that FC Bank received copies of the D.M.D. LP agreements. FC Bank allegedly knew or should have known that under these agreements the principals were not authorized to execute the quitclaim deeds (PP157-58).

That is insufficient to justify the inference of FC Bank's knowledge. A rider to the D.M.D. LP agreements permitted M.D.A. to execute such quitclaims deed under certain circumstances (Id. Exh. C - Rider P5(c)). No facts are pleaded showing that FC Bank, or any of its agents, knew or should have known that those circumstances had not occurred.

A pattern of racketeering activity is not pleaded against Balbec Corp. and Questco. In paragraph 156 Dana alleges:

Upon information and belief, that defendants BALBEC CORP. and QUESTCO knowingly furnished false and fraudulent invoices for work, labor and services that were never performed or that was [sic] overbilled with knowledge that said invoices would be submitted to defendant FIRST CONSTITUTION BANK for draw-down payment; that at all times mentioned herein BALBEC CORP. and QUESTCO served and acted as a conduit to the "enterprise" to obtain construction loan funds from FIRST CONSTITUTION BANK.

To plead a pattern of bank fraud acts, Dana is required to, but does not, specify two specific false or fraudulent invoices from each affiliate. Moreover, Dana provides no facts upon which its information and belief are based. Therefore, claims III and IV are dismissed against Balbec Corp. and Questco for failure properly to plead that they committed predicate racketeering acts.

The bank fraud allegation against the principals is well pleaded. 18 U.S.C. § 1344 makes it a crime knowingly:

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

Dana alleges that the principals obtained a mortgage from FC Bank by means of the false and fraudulent pretense and representation that M.D.A. had valid title to the Marina Property. Dana alleges, with sufficient particularity, that M.D.A.'s title was fraudulently obtained and a sham.
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It also alleges with particularity other circumstances of the fraud, including the date and the amount of the loan (Complaint P148).

The allegation of knowingly transporting across state lines money obtained through fraud, in violation of 18 U.S.C. § 2314, is pleaded properly. Dana alleges (Id. P154):

On August 31, 1988, by virtue of the fraudulent acts and misrepresentations described above, the defendants obtained the sum of eighty thousand ($ 80,000.00) dollars from defendant FIRST CONSTITUTION BANK and thereafter, upon information and belief, transported or caused to be transported a portion thereof from the State of Connecticut into the State of New York.

Since the complaint adequately pleads the two RICO predicate acts of bank fraud and interstate transportation of money obtained through fraud, there is no need to consider the alleged defects in the pleading of the mail and wire fraud claims.

Dana alleges that the principals executed two separate but related schemes (the Valeria scheme
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and the Marina scheme) fraudulently to obtain an interest in real estate, borrow money from a bank against that interest, and divert that money to themselves. This sufficiently alleges a "pattern." under H.J., Inc..

2. Acquiring an Interest in an Enterprise

Claim III alleges violations of 18 U.S.C. § 1962(b) and (c). The principals argue that claim III does not state a claim under § 1962(b), which forbids "any person through a pattern of racketeering activity . . . to acquire or maintain, directly or indirectly, any interest in or control of any enterprise . . . ."

Dana does not plead that the principals acquired or maintained an interest in an enterprise. In paragraph 128 it alleges that "defendants desired to acquire an interest in the said real property," but that does not state a claim under § 1962(b), because real property is not an enterprise. Furthermore, Dana is required to, but does not, allege a causal connection between defendants' interest in or control of an enterprise and Dana's injuries. See Browning Ave. Realty Corp. v. Rosenshein, 774 F. Supp. 129, 140 (S.D.N.Y. 1991); Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 709 F. Supp. 438, 452 (S.D.N.Y. 1989).

Claim III states a claim only under 18 U.S.C. § 1962(c) which forbids "any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . ."

3. RICO Conspiracy

Claim IV alleges a violation of 18 U.S.C. § 1962(d) which forbids "any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section."

The properly pleaded predicate acts are bank fraud and interstate transportation of fraudulently obtained money. Dana therefore must, but does not, allege specifically that each defendant agreed to commit both these acts. The alleged agreement to commit common law fraud cannot be the basis for a RICO conspiracy claim, because common law fraud is not a predicate act. Claim IV fails to state a claim, and is therefore dismissed.

V. THE PENDENT STATE LAW CLAIMS

Claims V, VI, VII, VIII, IX, and XVI assert state law claims pendent to federal claims I and II (the Valeria claims). Because claims I and II were dismissed, these pendent claims are dismissed for lack of an independent basis of subject matter jurisdiction. See 28 U.S.C. § 1367(c)(3). Claim XV is dismissed to the extent that it relates to the Valeria transaction.

The parties have stipulated to dismiss claims X, XI, and XII, against defendant Friedman Alpern & Green, without prejudice.

28 U.S.C. § 1367(a) allows supplemental jurisdiction over pendent state claims which "form part of the same case or controversy" as the federal claims asserted, even if the state claims involve additional parties. Therefore, this court has supplemental jurisdiction over claim XIII (against the principals and FC Bank), claim XIV (against FC Bank), and claim XV (against the principals, Balbec Corp. and Questco), which are part of the same case or controversy as the RICO claim (claim III) which was sustained.

1. Claim XIII -- Declaratory Judgment and Injunction

In Claim XIII, Dana seeks a declaratory judgment that D.M.D. LP's quitclaim deeds and FC Bank's mortgage on the Marina property are invalid, and an injunction against further transfer of the property and against enforcement or transfer of the mortgage. FC Bank has already commenced foreclosure proceedings on the mortgage in the Connecticut state court. (Complaint § 217).

FC Bank argues that this court cannot enjoin state foreclosure proceedings. See 28 U.S.C. § 2283 (federal court "may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.").

Dana argues that the requested injunction is necessary in aid of this court's jurisdiction and to protect or effectuate this court's judgment because if FC Bank forecloses on the mortgage and this court later finds the mortgage invalid, that judgment would be ineffective.

The "protect or effectuate its judgments" exception, also referred to as the "relitigation" exception, applies only to matters already fully adjudicated, and judgments already entered, by a federal court. "This does not permit a federal court to enjoin state proceedings to protect a judgment that the federal court may make in the future but has not yet made." 17 Wright, Miller & Cooper, Federal Practice and Procedure § 4226 at 548-49; Bruce v. Martin, 724 F. Supp. 124, 131 n.11 (S.D.N.Y. 1989).

In claim XIV Dana alleges that FC Bank owed it a duty to investigate the circumstances of the quitclaim deeds before issuing the mortgage loan, and failed to exercise due care in issuing the loan and in allowing disbursements under it (Complaint PP227-30).

FC Bank argues that it had no duty to Dana, and that its alleged duty is not pleaded with particularity. However, claim XIV states a claim, does not need to be pleaded with particularity as it does not allege fraud or mistake, and is properly pleaded in accordance with Fed. R. Civ. P. 8(a).

3. Summary Judgment (Claims XIII and XIV)

FC Bank moves for summary judgment dismissing claim XIII, to the extent that it seeks a declaratory judgment that FC Bank's lien on the Marina Property is invalid, and claim XIV. Under Fed. R. Civ. P. 56(c) the party moving for summary judgment must demonstrate the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).

FC Bank has not established its entitlement to judgment as a matter of law with respect to claim XIII. It argues that it acted as a "bona fide lender for value, without any prior notice whatsoever of any facts or circumstances which would have put a prudent lender . . . on notice as to any alleged fraud or as to any other right, title or interest in conflict with [FC Bank's] position as a first mortgagee." (FC Bank's Rule 3(g) Stmnt. P11). However, FC Bank's submission is insufficient because it fails to set forth the legal elements it must establish to show that its mortgage is valid, and to show that there is no factual dispute with respect to each element.

FC Bank is entitled as a matter of law to summary judgment dismissing claim XIV. The elements of a claim for negligence are a duty to plaintiff and breach of that duty. FC Bank had no direct dealings with Dana, the limited partner of its borrower, and did not owe Dana a duty of care. Cf. National Union Fire Ins. Co. v. Eaton, 701 F. Supp. 1031, 1040 (S.D.N.Y. 1988). In any event, there is no showing that FC Bank's failure to discover the fraud was negligent. In order to defeat FC Bank's motion, Dana was required to, but did not, submit factual or legal support for its allegation that FC Bank owed it a duty and breached that duty. See R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 77 (2d Cir. 1984) (non-movant may not rest upon conclusory allegations or denials to defeat summary judgment motion, but rather must provide "concrete particulars" in the form of supporting facts or arguments in opposition); Markowitz v. Republic Nat. Bank, 651 F.2d 825, 828 (2d Cir. 1981) (same).

CONCLUSIONS

The motions of all parties to dismiss claims I, II, IV, V, VI, VII, VIII, IX, and XVI are granted.

The principals' motion to dismiss claims III and XV is granted in part and denied in part; their motion to dismiss claim XIII is denied.

FC Bank's motion to dismiss claim III is granted; its motion to dismiss claim XIII pursuant to Rules 12(b) and 56(c) is granted in part and denied in part; and its motion for summary judgment dismissing claim XIV is granted.

Balbec Corp. and Questco's motion to dismiss claim III is granted and their motion to dismiss claim XV is granted in part and denied in part. Claim XV is dismissed against all the other affiliates.

Plaintiffs have leave to replead the dismissed claims within 30 days.

Dated: New York, New York

March 19, 1992

LOUIS L. STANTON

U.S.D.J.

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